How Much Should The Federal Government Subsidize Retirement? - Part II

Commentary by John C Goodman

December 13, 2012

Source: Forbes

Our federal deficit problem is an entitlement problem. And our entitlement problem is mainly about income and health care for the elderly. As I pointed out in a previous post, entitlements for the elderly mainly subsidize retirement. If we cut back on spending, seniors will have less retirement income unless they work more and save more to replace those retrenchments.

How much should we cut back and how should we do it?

One frequently mentioned proposal is to raise the age of eligibility — which is inching up to age 67 for normal Social Security benefits and age 65 for Medicare. Increased life expectancy is allowing seniors to collect more benefits than was originally intended, it is argued. So we need to raise the eligibility age to keep the system solvent. Since 1970, for example, life expectancy at birth has increased seven years. To keep Social Security and Medicare affordable, therefore, should we consider increasing the age of eligibility by seven years?

New York Times columnist Paul Krugman calls such proposals “cruel,” arguing that the life expectancy gains at age 65 are mainly the gains of the top half of the income distribution. (See the chart.) Krugman writes:

[A]ny further rise in the retirement age would be a harsh blow to Americans in the bottom half of the income distribution, who aren’t living much longer, and who, in many cases, have jobs requiring physical effort that’s difficult even for healthy seniors. And these are precisely the people who depend most on Social Security.

Another study of income and life expectancy was produced by Thomas Saving and his colleagues for my own National Center for Policy Analysis. This one used county data and it found that life expectancy generally rises as lifetime income rises. In other words, the more you earn, the longer you live, although the relationship is far from perfect. Again, the inference is that a higher retirement age, as the sole strategy in reforming Social Security, hurts lower income retirees the most.

But wait a minute. The real problem here is that not everyone can expect to live to the same age. And income isn’t the only thing that matters. Take race and sex, for example. A white male today has a life expectancy at birth that is five years longer than a black male. A white female at birth has a life expectancy of about 10 years longer than a black male. Raising the retirement age would take proportionately more benefits away from blacks than whites and from men than women.

Life expectancy also differs by location. According to one study:

[T]he range of life expectancy at birth for the years 1999-2001 extended from 72.3 for the District of Columbia (lowest) and 73.6 for Mississippi (second lowest) to 79.0 for Minnesota (second highest) and 79.7 for Hawaii (highest). Life expectancy at age 50 for the same years reflected a similar hierarchy: from 28.0 for both the District of Columbia and Mississippi to 31.4 for Minnesota and 32.4 for Hawaii.

The disparities are even greater at the county level, where life expectancy at birth for women who live in the top county is 13 years longer than for women who live in the county at the bottom. Among males, life expectancy at the county level differs by 18 years!

Saving and his colleagues point out that if our chief concern is over the progressivity of benefits there is another way to go about reform: raise the eligibility age and at the same time change the benefit formula to offset the regressive effects of the age change. This saves the government money while maintaining the current progressivity of Social Security.

But there is something else to consider. Why do differences in life expectancy exist? Surely part of the reason is the choice of lifestyles. Some people live healthier lives than other. If we want to encourage healthier living (and just about everybody seems to want to do that) doesn’t it make sense to allow people who live healthier lives to reap the economic rewards of doing so?

Any eligibility age arbitrarily favors some groups over others. But why do we all have to have the same age of retirement? In Chile people can choose their own retirement age. Chileans save in private accounts and when they have saved enough to provide a minimum retirement income, they can purchase a retirement income annuity — at any age! Plus they can keep right on working while they receive their annuity.

Had we been wise enough to follow Chile’s example, we wouldn’t be having this debate.

John C. Goodman is President of the National Center for Policy Analysis, a Research Fellow with The Independent Institute and author of Priceless: Curing the Healthcare Crisis